Macro Intelligence: China's property crisis sends shockwaves through global markets

In this week’s edition of Macro Intelligence, we take a look at the struggling Chinese property sector and what it means for the outlook for iron ore and Aussie investors.

China’s crisis

China's property sector is under increasing pressure as developers grapple with servicing their substantial debt. In August, China Evergrande, one of the country's largest property developers, sought bankruptcy protection in the United States as part of a debt restructuring plan.

Financial repercussions

Country Garden, China's largest property developer, also teetered on the edge of collapse with debts totaling $11 billion. However, it seems to have secured a last-minute reprieve with an extension from creditors to repay some of its loans. In recent years, as many as 53 Chinese developers have faced similar collapses.

Investor apprehension regarding the property crisis has triggered a sell-off in Chinese developers' dollar bonds, impacting forecasts for Chinese economic growth. Recently, global rating agency Moody's revised its 2024 economic forecasts for China downward to 4% from 4.5%.

A crisis in China’s property market poses a significant risk to its post-COVID recovery. The Chinese government has introduced a series of measures to support the sector, providing temporary relief to markets and investors.

GDP, CPI, and benchmark lending rate chart

Iron ore outlook: China's influence and Goldman Sachs' projections

Iron ore prices are primarily influenced by China's supply and demand dynamics. Recent property support measures from the Chinese government have ignited a surge in the metal's price. However, it was just last month when Goldman Sachs predicted that iron ore prices could enter bear market territory. This concern arises as China considers increasing cuts to its steel production while the physical market heads towards surplus.

The Goldman Sachs team forecasts that prices will average US$90 per tonne for the remainder of 2023. This implies a decline of more than 20 percent from the commodity's recent peak, meeting the technical definition of a bear market.

Iron ore daily chart

Impact on the Australian property sector

So, what does this mean for the Australian property sector? The latest CoreLogic data reveals that the Home Value Index rose by 0.8% in August, while Sydney home prices increased by another 1.1%. Concerns about the China property contagion have also impacted the Australian dollar, making our market appear more attractive to foreign investors.

Data from Juwai IQI Group indicates that the Australian property market continues to be a key destination for Chinese property buyers, suggesting that our market could potentially benefit from increased offshore interest.